Written by Sarah Hancock | Last Updated February 24th, 2020Sarah Hancock is passionate about green living and sustainability. She frequently writes about renewable energy and manages the Solar blog at BestCompany.com.
Personal loans can be a good place to turn if you are low on funds but need to consolidate high-interest debt or make a large purchase. Many people take out loans for home remodeling, new cars, or for paying student debt. However, there are a few important things that you should know about personal loans before you sign on the dotted line, including the following:
1. Security Requirements are Limited
Most personal loans are classified as unsecured debt because they are backed solely by the borrower's good word rather than physical collateral, such as his or her home or car. Not only does this make obtaining a personal loan much more feasible for individuals who need access to cash but do not have sufficient collateral to put up, it also cuts down the loan processing time because less documentation is required.
2. Terms are Fixed
While variable interest rates fluctuate with the market, fixed interest rates remain the same throughout the entire life of the loan. The majority of personal loans have a fixed interest rate and a specified repayment term, making it simple for a potential borrower to see how payments will fit into his or her budget.
3. Interest Rates are Competitive
Although the interest rates attached to unsecured personal loans are normally a bit higher than those attached to secured loans due to the lack physical backing, borrowers should not expect to receive an outrageously high rate. In fact, personal loan APRs are typically lower than credit card APRs, and borrowers with excellent credit can lock in rates under 5 percent with some lenders.
4. APRs Depend on Credit
With most personal loan companies, the APR ultimately depends on the borrower's credit score and history. Although other factors, such as annual income and debt-to-income ratio, may be considered, having a stellar credit score is the key to securing a low interest rate.
5. Minimum Amounts are Low
Minimum amount requirements for most other types of loans are relatively high. However, personal loans usually have low minimum amount requirements, making them ideal for individuals who don't need to borrow an extremely large amount of money but still want a reasonable interest rate. Consider OneMain Financial, which offers personal loans from $1,500.
6. Fees are Possible
There are a number of fees that may be associated with a personal loan. For example, borrowers could incur application fees, origination fees, check processing fees, late fees, or prepayment fees. It's wise for individuals who are considering a personal loan to confirm fees with the potential lender before applying so that they are aware of exactly what they will be subject to.
7. Use is Flexible
Unlike home, car, and student loans, personal loans can be used for a variety of purposes, including debt consolidation, home improvement, major purchases, vacations, car financing, wedding costs, medical bills, and business expenses. Some personal loan companies have stricter loan use stipulations than others, so borrowers who are unsure if they will be allowed to use funds for their desired purpose should talk to the potential lender before applying.
8. Funding is Quick
Because there's no need to provide collateral for a personal loan, there is less paperwork to be done and the application process can be completed much faster. In many instances (, borrowers can receive funds within hours of applying. This is especially beneficial for those who need access to money quickly or want to start making payments on debts that they are already behind on.
When you're ready to apply for a personal loan, it's a good idea to shop around and compare multiple quotes in order to identify the loan that is best for you and your situation. Click here to browse top rated personal loan companies.